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As Of Filer Filing For·On·As Docs:Size Issuer Agent 2/19/08 Bright Horizons Family Solut… Inc SC 13E3 12:16M Bright Horizons Family Solut… Inc Bowne of Atlanta Inc/FA Bain Capital Fund X, L.P. Joshua Bekenstein Swingset Acquistion Corp. Swingset Holdings Corp. |
Document/Exhibit Description Pages Size
1: SC 13E3 Bright Horizons Family Solutions SC 13E3 HTML 110K
2: EX-99.(B)(1) EX-99.(B)(1) Letter Agreement, Dated as of HTML 61K
January 14, 2008, Among Goldman Sachs
Credit Partners, L.P., Swingset Holdings
Corp. and Swingset Acquisition Corp.
3: EX-99.(B)(2) EX-99.(B)(2) Letter Agreement, Dated as of HTML 67K
January 14, 2008, Among Gs Mezzanine
Partners V,L.P., Swingset Holdings Corp.
and Swingset Acquisition Corp.
4: EX-99.(B)(3) EX-99.(B)(3) Limited Guarantee, Dated as of HTML 41K
January 14, 2008,By Bain Capital Fund X,
L.P. in Favor of Bright Horizons Family
Solutions, Inc.
5: EX-99.(B)(4) EX-99.(B)(4) Letter Agreement, Dated as of HTML 28K
January 14, 2008, Among Bain Capital
Fund X, L.P. and Swingset Holdings Corp.
6: EX-99.(C)(3) EX-99.(C)(3) Presentation of Goldman, Sachs & HTML 73K
Co. to the Special Committee of the
Board of Directors of Bright Horizons
Family Solutions, Inc., Dated June 13,
2007.
7: EX-99.(C)(4) EX-99.(C)(4) Presentation of Goldman, Sachs & HTML 36K
Co. to the Special Committee of the
Board of Directors of Bright Horizons
Family Solutions, Inc., Dated November
6, 2007.
8: EX-99.(C)(5) EX-99.(C)(5) Presentation of Goldman, Sachs & HTML 30K
Co. to the Special Committee of the
Board of Directors of Bright Horizons
Family Solutions, Inc. Dated January 9,
2008.
9: EX-99.(C)(6) EX-99.(C)(6) Presentation of Goldman, Sachs & HTML 21K
Co. to the Special Committee of the
Board of Directors of Bright Horizons
Family Solutions, Inc. Dated January 13,
2008.
10: EX-99.(C)(7) EX-99.(C)(7) Presentation of Evercore Group HTML 181K
L.L.C to the Special Committee of the
Board of Directors of Bright Horizons
Family Solutions, Inc. Dated November 6,
2007.
11: EX-99.(C)(8) EX-99.(C)(8) Presentation of Evercore Group HTML 91K
L.L.C to the Special Committee of the
Board of Directors of Bright Horizons
Family Solutions, Inc. Dated January 9,
2008.
12: EX-99.(C)(9) EX-99.(C)(9) Presentation of Evercore Group HTML 97K
L.L.C. to the Special Committee of the
Board of Directors of Bright Horizons
Family Solutions, Inc., Dated January
13, 2008.
| EX-99.(c)(3) Presentation of Goldman, Sachs & Co. |
| Project Swingset – Special Committee Materials Discussion of Financial Analysis Strictly Private and Confidential |
| Goldman, Sachs & Co. 13-June-2007 |
| Table of Contents |
| I. Recent Trading — II. Financial Projections — III. Financial Analysis — IV. Other Industry Players — Appendix A: Supporting Financial Analysis — Appendix B: Shareholder Structure — Appendix C: Industry Fundamentals — |
| Goldman Sachs does not provide accounting, tax, or legal advice. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you (and each of your employees, representatives, and other agents) may disclose to any and all persons the US federal income and state tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. |
| I. Recent Trading |
| Swingset Historical Stock Price Performance June 2002 to DateSource: FactSet |
| Shares Traded at Various Prices Selected Time IntervalsSource: FactSet 1 Month 3 Months —— — 6 Months 1 Year —— — |
| Historical Forward P/E Multiples |
| Swingset and Selected CompositesSource: FactSet(1) K-12 Technology Composite includes Leapfrog, Plato Learning, and Renaissance Learning. |
| (2) Post Secondary Composite includes: Apollo, Capella, Career Education, Corinthian, DeVry, ITT, Laureate, Lincoln, Strayer, and UTI. |
| Historical LTM EBITDA Multiples |
| Swingset and Selected Composites Source: FactSet(1) K-12 Technology Composite includes Leapfrog, Plato Learning, Proquest, and Renaissance Learning. |
| (2) Post Secondary Composite includes: Apollo, Capella, Career Education, Corinthian, DeVry, ITT, Laureate, Lincoln, Strayer, and UTI. |
| Swingset IBES Estimates vs. Management Plan |
| ($ in millions, except per share amounts)Source: Company Management, IBES |
| Firm Analyst Date of Estimate Price Target Rating Revenue ; EBITDA1 EPS2 5 Year Growth ============== ======================== ====================== 2007 2008 2007 2008 2007 2008 —— —— —— —— —— — |
| BMO Capital Markets J. Silber 2-May-2007 44 Buy $770 $847 — — $1.72 $2.02 — |
| —— —— —— —— —— —— —— —— —— —— —— — |
| Credit Suisse B. Dobell 2-May-2007 43 Hold 766 — $107 — 1.78 — — |
| —— —— —— —— —— —— —— —— —— —— —— — |
| Lehman Brothers M. Lasser 1-May-2007 40 Hold 768 820 — — 1.77 1.96 18.0% —— —— —— —— —— —— —— —— —— —— —— — |
| Robert W. Baird & Co. A. Junker 3-Apr-2007 40 Hold 767 844 102 115 1.77 2.04 20.0 |
| —— —— —— —— —— —— —— —— —— —— —— — |
| Stifel Nicolaus & Co. Craig / Herman 2-May-2007 — Hold 768 841 — — 1.80 2.10 — |
| —— —— —— —— —— —— —— —— —— —— —— — |
| Suntrust Robinson Humphrey M. Hughes 1-May-2007 50 Strong Buy 772 864 — — 1.79 2.06 16.0 |
| —— —— —— —— —— —— —— —— —— —— —— — |
| Thinkequity Partners K. Edwards 2-May-2007 43 Hold 769 857 106 120 1.77 2.07 25.0 |
| —— —— —— —— —— —— —— —— —— —— —— — |
| IBES Median $768 $846 $107 $118 $1.77 $2.05 19.0% |
| —— —— —— —— —— —— —— — |
| Swingset Management $770 $854 $107 $121 $1.78 $2.05 16.4% |
| —— —— —— —— —— —— —— — |
| 1 EBITDA after equity expense for comparability with broker forecasts. |
| 2 Management projected EPS based on management estimated 27.06 million diluted shares outstanding. |
| Forward Analyst EPS Estimates Over Time June 2002 to DateSource: Thomson |
| Research Analyst Views – Targets and Recommendations |
| Note: Based on the recommendations of 7 research analysts, as of 10-Jun-2007. |
| EPS Estimates ($) Recommendations Selected Commentary Challengesn “We expect the Ford / UAW contract to continue to create some noise in the near term while the relationship completely winds down. Long term we see positive opportunities for the remaining pieces of Swingset’s business as the new center pipeline is solid (60+ centers) and the average center size ramps up (especially in International) as well as ramping contributions from back-up care centers and College Coach” – Credit Suisse, 30-Apr-2007 — n “The early care and education services market is highly fragmented and competitive. There are over 40,000 for-profit firms operating in the market with 25% of the revenue going to the top 50 companies. The work-site-based childcare market consists of over 2,000 centers with a total market size of $2 billion” – Robert W. Baird, 1-May-2007Opportunitiesn “The Company still intends to open 50-55 centers in 2007 and close 10-12 (excluding the 26 from Ford), which would represent about 2% expansion of the center base. Activity at the front end of the sales pipeline remains robust and despite active center openings, the pipeline still stands at 60+ centers.” – Stifel Nicolaus, 1-May-2007 — n “[The Backup Care Advantage] program expands the company’s range of services to include sick children care and elderly care, extends their services network beyond just their existing center base to include other center and home-based care options ...this service generated revenue of about $2.5 million in 2006 and the annual run rate could be double that by year end 2007” – Stifel Nicolaus, 1-May-2007Valuationn “We believe the stock is fairly valued. Historically, Swingset has traded 18x-30x forward earnings, with an average of 24x; however, the multiple has declined to the lower 20s over the past year, which we believe is warranted given the slower growth. Our $40 price target is based on 20x our 2008 EPS estimate” – Robert W. Baird, 1-May-2007 — n “Our target price remains at $43 which is 24x/9-10x our FY07 EPS/EBITDA estimates and embeds 12.5% long-term profit growth 12 months from now. We see limited upside from current levels and maintain our Neutral rating” – Credit Suisse, 30-Apr-2007 — n “Our target price of $50 represents a P/E multiple of 24x our 2008 EPS estimate of $2.06. This is consistent with the company’s five-year average P/E and is also in keeping with the valuation of other high quality business services companies. We believe the corporate daycare market is attractive because of its consistent demand and the opportunity for margin expansion during economic slowdowns, when daycare worker wages lag price increases” – SunTrust Robinson Humphrey, 30-Apr-2007 — |
| II. Financial Projections |
| Business Model Characterized by High Degree of Stability and Visibility |
| n Swingset is a leading player in work-site based childcare with few alternatives available for its customers |
| — Almost no other competitor offers same quality of service and geographical reach — Swingset has five times the market share of its next largest competitor n Protected revenue stream with significant pricing leverage vis-a-vis customers — Average growth rate in tuition fees has been consistently around 4-5% per year — ~97% client retention rate: once committed to Swingset it is relatively difficult for customers to switch providers - Long term nature of contracts with durations ranging from 3 to 15 years - Customers contribute capital for new managed or sponsored centers up-front |
| - Teachers are a key factor in parents’ choice for a center; they are employed by Swingset and would be retained if a customer switched providers |
| -Childcare has become almost an essential service for working mothers — The new development pipeline has a 2-3 year lead-time until centers come on stream n Resilient margins through management contracts / positive spread between tuition and wage costs — Tuition has consistently growth at an average of 4-5% vs. wage cost increases of around 3% per year |
| — Tuition rates are typically fixed at the end of each year and can reflect recent information on the development of cost items. Therefore, net cost increases are transparent |
| — No revenue risk on 40% of full service contracts and 55% of back-up care contracts — Limited exposure to government funded childcare; rather to employee/employer funding n High return on capital from management contracts and employer sponsoring — Swingset does not commit capital to managed centers — Sponsored centers are partially funded by employers |
| Historical and Projected Financial Performance $ in millionsSource: |
| Revenue Growth and EBITDA Growth Indicators —— — |
| CAGR’01-’06’07E-’12ERevenues15.1%12.6%Center Profit22.213.9EBITDA25.815.1EBIT30.316.3Net Income29.318.5EPS27.617.5 |
| Center Margin Margin Indicators —— — |
| Margin’01’06’12ECenter14.7%19.8%21.9%EBITDA8.613. 516.2EBIT5.810.813.4Capex6.14.74.0NWC(4.6)(5.7)(5 .8) |
| Source: Public Filings and Management |
| Revenue Growth and Profitability by Segment Center Profit, Incremental Margin and Contribution from Ancillary Services Over Time Source: |
| 2007E Center Profit 2012E Center Profit 2007E — 2012E CAGR —— —— — |
| SegmentRevenueCenter ProfitBase Business4.1%6.5%Total Care Facilities12.112.6College Coach25.025.1BUCA37.032.4Me mberships46.046.0Total New Segments32.731.3Total12.6%1 3.9% |
| Care Facilities Center Profit Total Profit (Incl Services) YoY Change in Center Margin —— —— — |
| Source: Management Note: Total care facilities represents base business centers and new centers |
| Base Business – Historical and Projected New Center Mix Projections vs. Historical Performance Source: |
| Steady Growth of Center Count Increasing Share of Organic Developments —— — |
| U.S. Projected to be the Key Driver Higher Share of Centers Taken on P&L —— — |
| Source: Management |
| Actual Performance to BudgetSource: Management 2004 to 2006 |
| Total Revenues — |
| EBIT — |
| Business Plan Sensitivity – Case Assumptions Cases Developed By GS Based on Management Guidance |
| Base Case Downside Case Upside Case —— —— — |
| n 4% p.a. n 3% p.a. n 5% p.a. Tuition/ n Enrollment flat for n Enrollment flat for n Enrollment flat for Enrollment mature centers mature centers mature centers |
| n 10% below management n Management projections plan n 10% above management — 61 new centers per year on — 55 new centers per year on — 66 new centers per year on average average average New Centers n Mix per management plan n Mix per management n Mix per management |
| n Accelerated increase — 45bp per year on n Gradual increase over n Margins remain flat average Margins in time — Constant at ~20.7% center n Higher wage/tuition Base Business — 24bp per year on average margin spread |
| n 12.6% sales CAGR n 11.3% sales CAGR n 14.1% sales CAGR n 24 bp margin expansion n Margins flat n 45 bp margin expansion Key p.a n 2012 center margin: p.a Forecasts n 2012 center margin: 21.9% 20.6% n 2012 center margin: 23.0% |
| Note: Base case per management plan; upside case and downside case have been developed based on management guidance for projected sales growth and margin development. |
| III. Financial Analysis |
| Preliminary Valuation Overview of Swingset Overview ($ in millions, except per share data) |
| Note: LTM EBITDA assumes a transaction to occur in mid 2007. Net debt and diluted shares (treasury stock method) outstanding assumed of $8.4 million and 27.1 million respectively.(1) Based on Swingset management projections as provided to Goldman Sachs.(2) Projected EBITDA after equity expense. |
| Enterprise Value1 FY2007 EBITDA2 / (Per Share Equity Value) Metrics % Premium —— —— — |
| n Share price of $40.28 (June 8, 2007) n 52-week high and low: $44.98 – $31.80 n 52-week weighted average: $38.66 per share8.1x – 11.4x (21)% – 12%n Present value of future share price using IBES median and management projections n Valued at a forward P/E of 22.8x (current) to 24.4x (12m average) and discounted at 9.3% cost of equity13.5x – 14.7x 32% – 44%n Assumes a forward P/E of 22.8x (current) to 24.4x (12m average) n $300mm to $400m share repurchase at end of FY2007 (27-36% of shares outstanding) driving EPS accretion in FY2008 up to 11%11.2x – 11.9x 9% – 17%n Assumes total leverage of 7.8x Debt / LTM EBITDA of $102.5m as of June 2007 (3.9x senior and 5.4x subordinated notes) n Management case ~22% IRR and 11.0x exit (low end) to ~19% IRR and 12.0x exit (high end) 12.4x – 14.0x 22% – 37%n Acquisition of Educate by Sterling Capital Partners (12.9x LTM EBITDA) and Busy Bees (15.1x LTM EBITDA) by ABC Learning n Implied acquisition premium of 22 – 39% to current price 12.4x – 14.2x 22% – 39%n Discounted to June 2007 based on management projections n Weighted average cost of capital of 8.5% — 9.5% n Terminal multiple range of 9.0x — 11.0x, which translates into a 2.0-4.0% implied perpetual growth rate12.4x – 15.2x 22% – 49% |
| 1. Illustrative Public Market Valuation – Discounted Prices Status Quo – Based on Forward Multiples |
| Note: Present values discounted at 9.3% cost of equity calculated as shown in the appendix. |
| IBES Median Estimates 1 — |
| Present Value per Share Future Value per Share |
| Management Projections 23 Current (forward) P/E calculated based on Swingset’s share price on 8-Jun-2007, divided by the respective IBES (forward) median EPS estimates.4 LTM Average (forward) P/E calculated based on daily share prices observed during the last 12 months divided by the respective IBES (forward) median EPS estimates. — |
| Present Value per Share Future Value per Share |
| 1 Assumes IBES median forward EPS for 2007 and 2008. 2009 – 2011 calculated by extrapolating using the IBES 5-year growth rate of 18%. |
| 2 Assumes Swingset management projections dated 16-May-2007. |
| 2. Illustrative Leveraged Recapitalization Analysis Source: Management projections dated
16-May-2007Note: Assumes 27.1mm diluted shares outstanding. LIBOR of 5.36% as of 21-May-2007.
Assumes transaction occurs at the end of June and is fully financed by issuance of incremental
debt. Assumes all scenarios of share buyback are purchased at the current share price of $40.28 Share Repurchase End of H1 2007 – Impact on FY2007 and FY2008 EPS Mgmt. Estimates |
| ($ in millions, except per share data) |
| Size of Buyback ($mm) |
| % of Shares Outstanding 9.0% 18.1% 27.1% 36.2% 45.2% 54.2% Credit Impact — Indicative Rating Ba2 / BB Ba3 / BB- B1 / B+ B1 / B+ B2 / B B2 / B —— —— —— —— —— —— — Debt / EBITDA5 1.25x 2.31x 3.38x 4.44x 5.50x 6.57x —— —— —— —— —— —— — Adj. Debt / EBITDAR1 2.38x 3.19x 4.00x 4.81x 5.62x 6.43x —— —— —— —— —— —— — |
| Weighted Average Cost of Debt 6.00% 6.38% 6.75% 7.25% 8.00% 8.75% Earnings Impact (FY2008) — PF FY2008 Net Income $ 54 $ 50 $ 45 $ 40 $ 33 $ 26 —— —— —— —— —— —— — PF FY2008 EPS $2.17 $2.22 $2.26 $2.27 $2.20 $2.02 —— —— —— —— —— —— — |
| FY2008 EPS Accretion 5.6% 8.2% 10.3% 10.9% 7.3% (1.3)% PF Share Price Based on Current $42.34 $43.38 $44.22 $44.46 $43.04 $39.56 |
| Forward IBES P/E PF Share Price Based on $44.85 $45.95 $46.84 $47.09 $45.58 $41.90 LTM Average Forward P/E |
| —— —— —— —— —— —— — |
| 1 Based on 2006 EBITDA of $94.1mm and rent of $29.5mm (capitalized per moody’s 6x methodology). |
| 2 Current (forward) P/E of 22.8x calculated based on Swingset’s share price on 21-May-2007 divided by the respective IBES (forward) EPS estimates. |
| 3 LTM Average (forward) P/E of 24.4x calculated based on daily share prices observed during the last 12 months divided by the respective IBES (forward) EPS estimates. |
| 3. Illustrative LBO Analysis – Transaction Funding Management Case / Assumes Purchase Price of $47.00 ($ in millions, except per share data) |
| Sources of Funds ($mm) Uses of Funds ($mm) |
| ====================================================================== =================== |
| Type of Securities Multiple of LTM EBITDA % of Total Sources —— —— — |
| 5.1x39%3.9x30%7.8x |
| 2.3x61% |
| 18%1.5x12%0.1x1%12.9x100% |
| 3. Illustrative LBO Analysis – Financial Sensitivities Assumes Management Base Case ($ in millions, except per share data) Note: |
| Note: (i) Swingset management projections dated May 16, 2007 (ii) 3-month LIBOR at 5.36% as of May 17, 2007; (iii) Assumes standard LBO / purchase accounting treatment. Incremental D&A from asset write-ups is tax-deductible for book purposes; (iv) Assumes 7.8x LTM EBITDA initial leverage; (v) Financing fees of 1.75% of bank debt and 2.75% of unsecured bonds raised are tax-deductible and are amortized over 10 year period; (vi) EBITDA numbers quoted are adjusted for non-cash equity compensation |
| 3. Illustrative LBO Analysis – Business Sensitivities Cases Developed Based on Management Guidance ($ in millions)Note: |
| Note: (i) Swingset management projections dated May 16, 2007 (ii) 3-month LIBOR at 5.36% as of June 8, 2007; (iii) Assumes standard LBO / purchase accounting treatment. Incremental D&A from asset write-ups is tax-deductible for book purposes; (iv) Financing fees of 1.75% of bank debt and 2.75% of unsecured bonds raised are tax-deductible and are amortized over 10 year period. |
| 4. Illustrative Private Market Valuation – Selected M&A Transactions $ in millions Note: |
| EV / LTM EBITDA Multiples Date Target Laureate Inc. Busy Bees Childcare Educate Inc. Ross University Whitman Education Le Petite Academy Kindercare Learning Group Centers —— —— —— —— —— —— —— — |
| Acquiror KKR, Citigroup, ABC Learning Sterling Capital DeVry Career Education ABC Learning &n bsp; Knowledge Universe Private Equity, SAC Partners, Capital and Citigroup, Private Sterling Capital Equity Partners —— —— —— —— —— —— —— — |
| EV ($mm) $3,815.0 $139.7 $518.5 $310.0 $203.9 $330.0 $1,040.3 —— —— —— —— —— —— —— — |
| Target Business n n Provider of n Provider of n Provider of n Provider of n Provider of n Private Post-secondary childcare services tutorial and other medical and career oriented center-based &nbs p; provider of early education provider and infant care supplemental veterinary post secondary education services ; childhood education in Europe and Latin nurseries to the education services education education and childcare to ; and care in the America and online employees of public to pre-kindergarten children between 6 United States post-secondary and private sector through twelfth weeks and 12 years education in the companies grade students U.S. |
| Source: Publicly available information |
| 4. Illustrative Private Market Valuation – Transaction Premia All Cash Transactions, Last Four Years (Premium to Price 1 Month Prior to Announcement) |
| Source: Thomson Financial, SDC() Includes transactions with total consideration from $1 billion – 5 billion. |
| 2003 2004 —— — |
| 2005 2006 |
| —— — |
| Appendix A: |
| 5. Illustrative DCF Flow Valuation – Sensitivity Analysis $ in millions |
| Illustrative Analysis at Various Prices for Swingset |
| ($ in millions) |
| IV. Other Industry Players |
| 1. ABC Learning Centers Limited Company ProfileSource: Capital IQ, research reports (US$ in millions) |
| Overview Financial Summary —— — |
| n ABC Leaning Centres Limited, headquartered in Murarrie, Australia, provides childcare services and education in Australia, US and NZ n ABC’s divisions include: — ABC Child Care: Operates child care centers under regional management licenses which it grants to Regional Management Centers. The centers care for children of 6 weeks to 5 years — ABC Training College: Offers nationally accredited training courses in child care and education — ABC Education Services: A provider of management services for the operation of schools n Largest listed global provider of childcare services — For FY 2007, forecasting 1,235 centers in Australia and NZ, 1,038 owned and 107 franchised centers in the US, and 33 owned and 15 managed in the UK n Recent acquisitions: La Petite Academy, Busy Bees, Children’s Courtyard, Hutchison’s Child Care, Kids Campus and Learning Care |
| Breakdown of Revenues by Geography Key Management —— — |
| TitleEdmund S. GrovesCEO of OperationsLe Neve GrovesCEO of EducationJames BlackCFOJ.M. ReynoldsCOO |
| 1. Background on ABC’s Recent Capital Raising |
| Description Selected Research Commentary —— — |
| n “ABC has indicated that the additional $401m of equity, $600m of notes combined with a new $1.44bn bank facility will provide ABC with the ability to acquire up to $2bn worth of assets. The logical targets would be the remaining large USA childcare companies (eg Knowledge Learning Corporate, Bright Horizons) to provide further scale in this business. Bright Horizons which has a US$1bn market capitalisation appears to be a stretch given the high price to earnings multiple of 20x FY08 adjusted earnings before a 30%+ takeover premium is applied. We would expect a potential acquisition of Bright Horizons to be marginally earnings per share accretive at best assuming significant synergies.” – Macquarie Research, 30-May-2007 – n “The good news is that: 1) ABS has increased its funding certainty which was looking stretched versus the plan to roll out further centres in Australia and NZ; 2) ABS has been able to undertake a successful equity placement to one investor, at a premium to the current share price, without the need to undertake a broad-based raising – we presume the new investor has significant confidence in the business to invest A$401m. The cautious angle is that ABS has loosely flagged that it will continue to consolidate the fragmented US market with part of the funding... The bad news is that in the absence of an acquisition to support the funding, today’s equity raising is dilutive on our modeling. We have lowered FY08 and FY09 EPS forecasts by 4% and 5%, respectively.” –ABN AMRO, 29-May-2007 n “Recent updated guidance now confirmed as the second option we had flagged at the time, dilutive capital raising, but has not been accompanied by any acquisition, hence the 12% increase in issued capital is dilutive on its face. ABS has indicated the new capital will be used to n On May 29, 2007, ABC Learning announces it plans acquire more US centres, and to raise $1bn to help repay bank debt and to fund also flagged interest in the further opportunities in the US Singaporean child care market.” n ABC will raise funds as follows: –Citigroup, 29-May-2007 — $401.5mm to come from new shares being issued to n “This offer is not Singapore government-owned investor Temasek completely unexpected as the — $600mm convertible notes issuance A$680m of acquisitions in Dec n The capital raising allows ABC to replace part 06 was covered by a bridge debt of its $1.6bn bridging facility obtained in December facility for later restructure. 2006 (due to expire next month) with a new $1.4bn loan Less expected was the issue of ABC Recent AcquisitionsDateTargetValue $401m in ordinary shares to a ($mm)DescriptionDec-2006Busy Bees (UK)$140n single holder. The capital Acquired for ~15.1x EBITDA restructure was accompanied by n Leading player in UK in both nursery (47 in UK) a comment that it will allow and voucher (30% market share) businessesDec-2006La ABS to take advantage of Petite Academy (US)330n Acquired for ~10.3x EBITDA opportunities in the US market. (pre-synergies) This appears at odds with our n Second largest childcare operator in US with 650 previous discussions where ABS academies in 36 US statesDec-2006Macquarie stated that they would spend a Childcare51n Owns and operates 41 centers in New period settling recent Zealand and 23 centers in Australia acquisitions and only take up n ABC’s last major corporate competitor in ‘compelling’ opportunities.” Australia – UBS, 29-May-2007 —— — |
| 1. Illustrative Acquisition Impact Analysis ABC (“Apple”) Acquires Swingset; Assumes 6.0x Maximum Leverage |
| ($ in millions, except per share data) |
| 2. Knowledge Universe Education, L.P. Company OverviewSource: Company presentations |
| Note: Financials are pro forma for the acquisition of KinderCare in January 2005 and the separation of KLC into KLC OpCo and KLC PropCo in November 2005 |
| Note: KLC OpCo EBITDA excludes non-recurring charges |
| Note: For 2005PF, KLC consolidated Debt / EBITDA was 5.5x, Debt / EBITDA – Capex was 8.4x, and EBITDA / Interest was 2.6x (US$ in millions) |
| Overview Overview —— — |
| n Knowledge Universe Education L.P. (“KUE”) is third largest for-profit education company in the world and largest for-profit education company in pre-K-12 segment in the world n KUE and affiliated companies were formed over past decade to engage in operating businesses focused on developing human capital during first two decades of life n Existing portfolio of assets consist of: |
| — Knowledge Learning Center Operating Company (“KLC OpCo”), leading early childhood education (“ECE”) company |
| with 2,507 locations in 39 states and DC — KLC Property Company (“KLC PropCo”), one of largest education based real estate portfolios in US consisting of 845 early childhood centers located in 37 states — Significant interest in k-12, online curriculum provider and K-12 management company, serving over 70,000 students as largest operator of online virtual schools in US Key Management Financials |
| —— — |
| NamePositionLowell MilkenCo-Founder, President and CEOMichael — |
| MilkenCo-Founder and ChairmanSteven GreenVice Chairman and Chairman and CEO of k1 Ventures Ted Sanders Vice ChairmanJeffrey SafchikCFO KUE Advisory BoardNamePositionLes BillerRetired Vice Chairman & |
| Chief Operating Officer of Wells Fargo & CompanyTed MitchellCEO of the New Schools Venture Fund — |
| 2. Knowledge Universe Education, L.P. Knowledge Learning Corporation |
| Overview Key Events —— — |
| n In November 2005, Knowledge Learning Corporation (“KLC”) was divided its business, with substantially all real estate owned by special purpose subsidiaries (“KLC PropCo”) and all customer contracts and operations remaining at KLC and other subsidiaries (“KLC OpCo”) n KLC OpCo: — — Mission to provide quality education to children from birth to college — Largest for-profit provider of Early Childhood Education (“ECE”) and care services in the US — Also operates (through a subsidiary) accredited high school distance learning programs serving over 200k students since 1975 — 2,507 total centers and sites in 39 US states and in DC n KLC PropCo: — — Owns 845 ECE centers in 37 US states (as of 31-Dec-2005), considered largest private owner of education real estate assets in the world — Managed by Greenstreet Real Estate Partners (including Steven Green, Chairman and CEOm Jeffrey Safchik, COO and CFO) |
| OpCo Business Units OpCo Centers and Sites —— — |
| OpCo Key ManagementNameTitleThomas HeymannCEOElanna YalowPresident & COODan JacksonEVP and CFO |
| 3. Post-Secondary Education Service Providers US$ in millionsNote: Dark blue bars indicate post-secondary education, light blue K-12 education and purple K-12 technology education companies. Market values are as of 21-May-2007. |
| Overview of Key Players Ranged by Equity Market Value Comments —— — |
| Strategic Players in K-12 n ABC Learning is the only player in K-12 Education market which is larger than Swingset, if ranked by market value — Equity financed acquisition would be highly earnings dilutive in the absence of substantial synergies — Debt financing capacity not sufficient for an acquisition of Swingset — However, might team up with a financial sponsor n Financing limitations would be a major hurdle for other K-12 competitors in with regard to unsolicited activity Strategic Players in Postsecondary n Post-secondary providers could financially make an acquisition work — Significantly larger in size — Mostly trade at higher P/E multiples than Swingset n However strategic rationale unclear due to very limited synergies, if any — Educational content is different — Marketing to a different target audience — No synergy in student financing — Revenue synergies from flow unlikely (post graduate; specialized vs-. broad schools) n Very limited SG&A synergies, if any |
| Appendix A: Supporting Financial Analysis |
| Public Market Valuation in the Education Sector $ in millions, except per share data |
| Drivers of Growth and Margins Going Forward Base Business and Ancillary Services |
| Revenue Growth Drivers Operating Coverage —— — |
| Base Business Base Business – Price/Cost Leverage n Additions to capacity growing at 6-8% p.a. n Tuitions paced above annual labor cost increases — New centers n Labor management — Expansions of existing centers Base Business – Additional levers n Price (tuition) increases of 4-5% p.a. n Enrollment at mature centers n Enrollment growth of 1-3% p.a. n Ramp-up of new sponsor profit and loss and lease — Immature centers (open less than two years) in early models stage ramp up n Improved contract economics — Mature centers marginal enrollment growth of 0.5% — n Acquisitions / transitions / mix of new centers 1.0% n Membership sales in existing centers Ancillary Services n Fix / close / sell underperforming centers n College Coach n Scale European operations n Backup Care Advantage (BUCA) n Overhead leverage n Membership sales in existing centers Ancillary Services n Additional programs (summer camps, event care, n Higher margin growth areas emergency care) — College Coach — BUCA — Back-up Consortium Centers — Elementary Schools |
| Illustrative Leveraged Recapitalization Analysis Share Repurchase End of H1 2007 – Impact on FY2008 EPS Mgmt Estimates |
| ($ in millions, except per share data) |
| Illustrative LBO Analysis – Overview of Transaction Funding Management Case / Assumes Purchase Price of $47.00 ($ in millions, except per share data) |
| Illustrative Private Market Valuation – Precedent M&A Transactions $ in millions |
| Illustrative Discounted Cash Flow Sensitivities Source: |
| Source: Projections as per Management as of 16 May 2007 |
| 4 Free cash flow discounted to end of June 2007. Terminal value calculated as of fiscal year 2011. |
| 5 Adjusts terminal value free cash flow for depreciation equal to capital expenditures and no deferred taxes in perpetuity. |
| Illustrative Deleveraging Sensitivities
Source: (i) Swingset management projections dated May 16,
2007 (ii) 3-month LIBOR at 5.36% as of June 8, 2007; (iii) Assumes standard LBO / purchase
accounting treatment. Incremental D&A from asset write-ups is tax-deductible for book purposes;
(iv) Financing fees of 1.75% of bank debt and 2.75% of unsecured bonds raised are tax-deductible
and are amortized over 10 year periodNote: Assumes purchase price of $47.00 per share. Change to Selected Credit Metrics: Alternative Sales Growth / EBITDA Margin Assumptions |
| Illustrative Deleveraging SensitivitiesSource: (i) Swingset management projections dated May 16,
2007 (ii) 3-month LIBOR at 5.36% as of June 8, 2007; (iii) Assumes standard LBO / purchase
accounting treatment. Incremental D&A from asset write-ups is tax-deductible for book purposes;
(iv) Financing fees of 1.75% of bank debt and 2.75% of unsecured bonds raised are tax-deductible
and are amortized over 10 year periodNote: Assumes purchase price of $47.00 per share. Cumulative Cash Flow Available for Debt Service: Alternative Sales Growth / EBITDA Margin Assumptions ($ in millions) |
| Swingset Weighted Average Cost of Capital $ in millions |
| Appendix B: Shareholder Structure |
| Swingset Ownership Profile Breakdown of Investors Source: |
| Top 15 Institutional Investors Ownership Analysis by Investor Type —— — |
| RankInstitutionStyleEquity Institutional Ownership Analysis by Investor Style Assets ($mm)# of Shares% of Total1Thornburg Investment ManagementCore Value32,9851,106,6654.2%2Selec t Equity GroupGARP5,8271,034,3174.03Art isan PartnersGrowth42,3271,032,4003 .94Jennison AssociatesGrowth61,216887,9163 .45Eagle Asset ManagementCore Growth10,774794,9633.06Kornitz er Capital Management Inc.Core Value4,230667,2962.67Century Capital ManagementGARP1,902646,0142.58 TCW Asset Management CompanyCore Growth53,302599,4502.39Loomis, Sayles & Company, L.P.GARP21,342557,9092.110M.A. Weatherbie & CompanyAggres. Gr.1,797532,9292.011Luther King Capital ManagementCore Growth6,113530,0002.012Palisad e Capital ManagementGARP2,068525,8002.01 3Kidron CapitalGARP357524,7002.014Oak Ridge InvestmentsCore Growth3,667491,2801.915Capital Research & ManagementCore Value882,214468,0001.8Top 15 Total10,399,63939.8% Top 5 Hedge FundsRankInstitutionStyleEquit y Assets ($mm)# of Shares% of Total1Renaissance Technology Corp.Hedge Fund46,971123,1150.5%2Highbrid ge Capital ManagementHedge Fund16,21263,7320.23Tewksbury Capital ManagementHedge Fund4,69656,5120.24Brant Point Capital ManagementHedge Fund43454,5000.25S.A.C. Capital ManagementHedge Fund10,53823,5490.1Total321,40 81.2% |
| Source: Thomson, public filings |
| Appendix C: Industry Fundamentals |
| Overview of the U.S. Childcare Market Market Size and Growth |
| Industry Overview For-Profit Childcare Market (1999-2011E) —— — Size ($ bn)Swingset Market Position n Americans spend a total of ~$55bn on childcare annually — For-profit childcare providers capture ~$15bn in revenues — Work-site childcare compose $2bn of this n Within work-site childcare, Swingset controls ~30% of market — Its share is ~5 times larger than its closest competitors — Key competitors are Knowledge Universe and ABC Learning — Growth in Women in Labor Force 20-34 Years Old Children Under 5 Years Old (in millions) —— — |
| Source: Equity research. |
| Overview of the U.S. Childcare Market Industry Outlook Going Forward |
| Growth Drivers Potential Risks —— — |
| n Growing recognition of importance of early education n Finding and retaining — Studies have shown early education increases likelihood of staff children obtaining higher education and generating greater earnings — 31% average annual turnover over their lifetime rate among staff, and many — High quality childcare programs increasingly perceived to have teachers are underpaid considerable long-term effects on school achievement, cognitive — Swingset offers excellent work skills, language ability, math skills, and social adjustment conditions and one of the most — Worldwide enrollment rates in pre-primary education have increased attractive benefit packages in ~9% since 1990 and are expected to continue to increase in future the industry years n Slowing economy n Positive legislation and government involvement — Could lead to corporations — Coordinated lobbying by activist groups has helped increase cutting costs and/or higher political awareness and improve voters’ attitudes toward benefits of number of unemployed parents with early education time to care for their own — Certain tax incentives are available to parents utilizing children childcare programs and to employers for childcare expenses n Government budget cuts n Improving demographics — Could negatively impact — Predicted increase in number of children under 5 yrs old in the industry’s favorable U.S. subsidies/demand — From 2002-2012, expected increase in women in labor force and — Most of Swingset’s revenues are mothers working full time between ages of 20-34 yrs (the age group generated from work-site based most likely to have children under 5 yrs during time period) childcare centers which are n Highly educated parents spend more on childcare funded by employers and employees — Correlation between families with higher education (i.e. college n Universal pre-K bypassing degrees) and higher spending on childcare childcare providers n Corporations recognizing work benefits of childcare services — Risk that government-funded — Worksite childcare viewed to be relatively inexpensive way to pre-K could become extension of maintain employee morale primary public schools and thus — Childcare services could be used as recruitment and retention tool reduce need for services from private sector |
| This ‘SC 13E3’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
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| Filed on: | 2/19/08 | PREM14A | ||
| 6/8/07 | ||||
| 5/29/07 | ||||
| 5/17/07 | ||||
| 5/16/07 | ||||
| List all Filings | ||||